Why Small Business Owners Should or Should Not Use Debt Settlement to Get Back on Track

A small business folding up after a few years is not an uncommon sight. According to Expertise, 70% of all businesses do not survive to see their tenth year. While there are many reasons for business failure, lack of capital is among the most quoted by business owners. When small business owners rack up a lot of debt on their credit cards, they often find it very difficult to manage to pay the monthly dues on time due to cash flow constraints. Consequently, the dues swell due to the application of late payment penalties and penal rates of interest making it even more difficult to get out of the debt trap. When entrepreneurs are well and truly ensnared in debt that they can’t hope to get out of, debt settlement is often suggested as a viable way of getting back on track without having to file for bankruptcy. However, the subject is not very well understood by most business owners and the confusion makes it even more difficult for a rational decision to be made. A brief examination of the concept of debt settlement as well as its pros and cons:

Understanding Debt Settlement

Debt settlement is ideal for business entrepreneurs who have chalked up so much debt that they are not in a position to pay them back unless there is a substantial reduction in the amount of the debt. The settlement process entails negotiating with creditors for the reduction of the debt and convincing them that unless a good offer is made, the only alternative is to file for bankruptcy, in which case, they would not get anything at all. The carrot for the creditors to settle is the promise of a lumpsum payment on an account that is already delinquent. Debt settlement may be done personally by business entrepreneurs if they are willing to put in the substantial time and effort required for the settlement process. Alternatively, they can engage a professional debt settlement company to negotiate and settle on their behalf. Remember only unsecured debt can be settled.

Advantages of Debt Settlement

Substantial reduction of debt possible: While not each and every debt settlement negotiation achieves 70% of the debt being forgiven as claimed by debt settlement company advertisements, it is true that if negotiated properly, there can be a massive reduction of debt. The extent of the debt forgiven depends on a number of factors, including the amount of the debt, the age of the debt, the credit report of the debtor, the reasons offered for financial circumstance, and above all the desperation of the creditor to get something back. The amount of money being promised as a lumpsum payment for the settlement is also a very important factor. Read debt settlement feedback online to find out how much of the debt is usually forgiven.

The possibility of the arrangement of flexible payments: If the entrepreneur does not have the ready cash to pay off the creditor for the one-time settlement, it may be possible for the debt settlement company to make the lump sum payment on his behalf. The business owner can then pay the debt settlement company in small and affordable installments; the schedule of payment can be structured in a mutually convenient manner. Such arrangements can also be changed mid-way if there is any need if both the parties agree.

A viable alternative to bankruptcy: Debt settlement is perhaps the most viable alternative to filing for bankruptcy. If a substantial reduction of debt is agreed to by the creditors, you can make lump sum payments in full and final settlement of the dues and free yourself from the burden of debt forever and focus on rebuilding your business. The creditor also gets back at least 50% of the dues, which can be a very powerful incentive for them to settle as they would have got nothing in case the customer had filed for bankruptcy.

A quick method of getting out of the financial mess: Compared to other methods of debt relief, debt settlement is perhaps the quickest. Generally, the entire process takes three to five years to complete with the largest amount of time being spent in saving the money to make the lumpsum payment to the creditor. If you can work out with debt settlement company a plan that allows you to pay back the company in easy installments, the process may be even faster.

Disadvantages of Debt Settlement

Negative impact on the credit score: Debt settlement has a negative impact on the credit score as the creditors report the debt as having being settled. The remarks stay on the credit report for seven years before being wiped off and during this time getting access to more credit may be a problem. However, if you don’t take on too many credit cards and make the payments on time taking care to keep the credit utilization below 30%, the credit score will see a gradual improvement.

No guarantee of settlement: Just because you want to settle the debt, it does not mean, that there is an obligation for the creditor to offer you debt settlement. Some card companies may just aggressively pursue you or hand over the debt to collection agencies or even sue you to get their money back.

Amount of debt increases: As entrepreneurs are normally advised to stop making payments to the creditors to save money for the lumpsum payment and to exert pressure for a settlement, the amount of the debt balloons with the application of late payment fines and penal interest. As the typical settlement takes more than two years, the amount of the dues can really zoom negating much of the benefit of the debt settlement.

An escalation in collection activity: When a creditor has been approached for debt settlement, it usually refuses to entertain the request and also tries to scare debtors into paying up by escalating the collection calls and threatening litigation. Entrepreneurs are likely to have a torrid time during this phase.

Conclusion

For entrepreneurs who are in real debt trouble, debt settlement can be a very effective way of staving off bankruptcy with a substantial reduction of their dues. However, they need to reckon with the fact that the settlement cannot be treated as a right and that the cost of the settlement can be very high.

Author Bio

Kelly Wilson is an experienced and skilled Business Consultant and Financial advisor in the USA. She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.

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World Executives Digest is a blog-style collection of bite-sized content for business executives constantly on-the-go. It is published by serial entrepreneur Homer Nievera to bridge the learning gap for upwardly mobile mavericks and bigshots.